Switzerland Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
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The Swiss National Bank's mandate is to ensure price stability, while taking due account of economic developments. In its monetary policy strategy, the SNB sets out the manner in which it operationalises this mandate. The SNB's monetary policy strategy has been in place since December 1999. It consists of three elements: an explicit definition of price stability as a long-term anchor; an inflation forecast as the main indicator for monetary policy decisions; and an operational target for the implementation of monetary policy, which was until mid-June 2019 a target range for the three-month Swiss franc Libor.

At its monetary policy meeting in June 2019, the SNB introduced the SNB policy rate, which has taken over from the three-month Libor. The reason for this replacement was that the future of the Libor is not guaranteed beyond the end of 2021. The SNB's inflation forecast is based on the assumption that a specified interest rate, previously the three-month Libor, remains unchanged over the entire forecast horizon of three years. The forecast in June 2019 extended into 2022 for the first time. The introduction of the SNB policy rate ensured that it will be based on the same interest rate over the entire horizon.

Introducing this policy rate has the following consequences for the SNB's monetary policy strategy. First, the definition of price stability remains unchanged. Second, since June 2019 the SNB's conditional inflation forecast has been based on the assumption of an unchanged SNB policy rate over the entire forecast horizon. Third, the SNB now uses this policy rate in taking and communicating its interest rate decisions.

The SNB policy rate is not a market rate like the three-month Libor, but a target for the level of market rates the SNB seeks to maintain. The SNB now ensures that the secured short-term money market rates are close to the SNB policy rate. In this regard, the SNB focuses on SARON, the most representative of the short-term Swiss franc rates. Given that SARON is an overnight rate rather than a three-month rate, there is no further need for a target range. This was previously necessary because expectations regarding future monetary policy could strongly influence the three-month rate.

The SNB policy rate also sets the terms for monetary policy-related transactions with the SNB. The conditions on the money market are currently determined by the interest rate banks pay on their sight deposits at the SNB. The interest on these deposits will at present correspond to the SNB policy rate.

The SNB's introduction of its policy rate does not alter its current monetary policy or, in particular, its expansionary stance. The SNB policy rate currently stands at –0.75%. Interest on sight deposits held by banks at the SNB remains at –0.75%, and the SNB will continue to be active in the foreign exchange market as necessary, while taking the overall currency situation into consideration. Given the low inflation environment, the highly valued Swiss franc and the fragile situation on the foreign exchange market, the SNB's expansionary monetary policy remains necessary to support economic activity and ensure price stability.